Lessor vs. Lessee: Rights, Duties, and New Lease Accounting Standards

Going to start a rent or a lease term and wondering who is the lessor and who is the lessee. Well, all these terms come under the property renting and leasing branch and are important to familiarize yourself with. 

This article will explain everything about lessor vs. lessee, types of lease agreements, and their relationship. So stay put and read the blog till the end to gain the best insights. 

What is a Lessee?

A lessee is the individual or a party that leases the property from the owner. Meaning, he pays the amount to gain the right to use the property for a particular period. This applies to every asset, including real estate, equipment, or a vehicle. 

Let’s say you want a place to live in a new city, so you find a rental apartment or home. You pay the amount to the owner to confirm the lease and sign the agreement. This makes you the lessee and the owner is the lessor. 

The accounting regulations, such as ASC 842 and IFRS 16, state that the lessee is required to include a right-of-use (ROU) asset and a lease liability on their balance sheet. This gives a systematic overview to reflect the future lease payments’ value.

What is a Lessor?

The lessor is the person who owns the property and allows another party to use it. The agreement is signed in exchange for regular payment. The ownership remains intact with the lessor; however, the right to use the property to the full extent is given to the tenant under the signed agreement.

Well, this primarily works in the real estate sector, where offices lease out the property from the owners and pay them the rent amount for it. The lease agreements are applicable in almost every industry. 

Now that you’ve learned the lessor meaning, let’s go ahead and understand its characteristic difference from the lessee in the next section. 

Lessor vs. Lessee: Differences in Responsibilities and Obligations Under Multiple Lease Agreement  

The responsibilities and duties of the tenant and the owner vary depending on the type of lease agreement. We have explained some common types of lease agreements and the responsibilities of both parties below: 

Gross Lease 

Under a gross lease contract, the tenant is usually only obligated to pay the base rent. The lessor is responsible for managing operating costs and building costs. The lists also include maintenance expenses, like utilities, insurance, and property taxes. Under certain contracts, lessees are demanded to cover extra costs after the initial year. Therefore, it is essential to review lease agreements thoroughly before signing.

Net Lease 

The tenant is demanded to pay for the property’s maintenance and other charges like electricity bills, annual repairs, and more. The owner is responsible for paying all other ownership charges and property taxes. 

Net leases are further categorized into three types, and each of them has different payment policies: triple net leases, double net leases, and single net leases.

In triple net leases, the tenant has to pay for maintenance costs, insurance, and property taxes. In double net leases, the tenant has to pay the rent, utilities, property taxes, and insurance. The lessor, on the other hand, is responsible for all maintenance expenses and repairs.

Under a single net lease contract, the lessee is responsible for paying base rent, utilities, and property taxes, and the other party pays for maintenance expenses and insurance.

Modified Gross Lease 

This is the type of gross lease that requires the lessee to pay their rent, utility bills, plus a part of operating expenses. The lessor is responsible for paying the remaining amount that is needed for property operations.  

So these are the different types of lease agreements and the responsibilities of both parties under them. Moving ahead, let’s understand the relationship dynamics of the lessor and lessee.  

Relationship Between Lessor and Lessee 

The dynamic relationship between the lessor and lessee is documented under the legal contract. It documents the shared duties and obligations to ensure that both parties fulfill their part: 

• Rights of Lessor: The landowner owns the property. He is allowed to collect rent, fines upon property destruction, and other charges if documented in the contract.
  
• Rights of a Lessee: The individual or a group staying at the property is entitled to exclusive possession and utilize the property for the duration of the contract based on lease terms. The lessor can not interfere with the means of utilization unless it is not being harmed.
  
• Duties of Lessor: The owner must ensure the proposed property is up to the mark based on the terms and agreement. Depending upon the terms, the lessor must maintain, repair, and provide the property in good condition.
  
• Duties of a Lessee: The lessee must pay the agreed rent on time and maintain the property in good condition as provided by the owner. Plus, they have to take care of certain restrictions like subleasing, modifications, and misuse of the property. 

The relationship between a lessor and a lessee is based purely on legal terms, however, certain emotional factors like trust are also involved in some cases. The legal terms may vary from state to state and country to country and are drawn to protect the interests of both parties. It is essential for each of them to read the local laws and do the research. 

What are the New Lease Accounting Standards Under Lessee vs. Lessor Accounting?

The leasing standards are ever-changing, as is the way of accounting. There are certain financial reporting standards that you must know: 

• ASC 842: In this standard, the leases are required to be maintained on a balance sheet. Lessors must document their lease types as fixed assets to get an income statement as rental yield. Lessee, on the other hand, needs to clarify all the finances, including operating costs and other penalties, within the given amount of time.
  

• IFRS 16: Accounting standards under IFRS 16 are different as it does not distinguish between finance and operating leases and considers them under a single model. The materials leased out by the lessee must come under finance leases and should be recorded on the balance sheet as ROU assets and liabilities. 
  
• GASB 87: Under this rule, the lessees need to recognize lease liabilities and assets on the date of term commencement. The owner needs to record the received lease amount and cash inflow at the commencement of the term. 

You must check out the local laws and the process to follow under the terms to understand how you can do lease accounting correctly. 

So this was all about lessor vs. lessee, their obligations, responsibilities, and relationship. We hope we have covered all the necessary details in this blog. Share the info with your friends and family to help them understand the terms.